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My family and I are residents in the USA. My British wife and her brother have received some inheritance from their father, which is to be shared with his ex-wife:

  • £120,000 cash.
  • A mortgage of £150,000 value (£450,000 property price, £300,000 unpaid)

It is still unclear at this point whether these items will be split into two or three, but the likelihood is that the property will be given to my wife and her brother (we will put the property into trust for our children) and their share of the cash will be used to pay off some of the mortgage. The property will be rented out once the ownership is transferred.

We have a few doubts in regards to paying these taxes in the US, such as:

  • Do we need to pay taxes because of the inheritance itself?
  • Since all the cash will be immediately used to pay off a mortgage, does it count as income?
  • Once the property is rented out, all of the money will go towards the mortgage, so does that count as income in the US as well (and therefore will be taxed)?
  • By having the property in our children's names, does that change anything tax wise?
  • What is the impact, from a tax perspective, of this co-ownership with her brother and his children?
  • Is the property going to be wholly owned by the trust? Or 50% by the trust and 50% by your brother in law? – Rupert Morrish Aug 6 '18 at 21:00
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    Wholly owned by the trust, which will be half for my children and half for his children. – Phil Aug 6 '18 at 21:01
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    I'm not a big fan of "ask a professional" responses, but this really is one. Find a tax lawyer in the US who understands foreign property ownership and trust issues. – Vicky Aug 8 '18 at 11:04
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If your wife receives no benefit from the trust, as you describe, then there should be no tax to pay.

Generally, mortgage interest is a deductible expense from rental income, mortgage principal payments are not. Be sure it's clear whether the trust is holding the mortgage of if your wife and her brother are. Depending on how the trust is set up it may be required to disburse all income to the beneficiaries (your children, nephews and nieces) and you want to make sure that is calculated after the mortgage is paid.

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    This answer overlooks many complicated tax realities for a US person having a foreign mortgage. Any event which substantially repays the mortgage (selling the house, refinancing the mortgage) can trigger significant ordinary gains if the mortgage currency fluctuated the wrong way against the dollar. – Eric Aug 7 '18 at 1:55

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